Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.) Cardinal Company is considering a five-year project that would require a $2,812,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. The project would provide net operating income in each of five years as follows Sales Variable expenses Contribution margin Fixed expenses: $2,855, 000 1,010,000 1,845, 000 Advertising, salaries, and other fixed out-of-pocket costs Depreciation 798,000 562,400 Total fixed expenses Net operating income 1,360,400 $ 484,600 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table Required 1. Which item(s) in the income statement shown above will not affect cash flows? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.) ?Sales Variable expenses Advertising, salaries, and other fixed out-of-pocket costs expenses Depreciation expense

Explanation / Answer

Solution 1:

Depreciation expense will not affect cash flows as it is a amortization of asset.

Hence, option 4 "Depreciation Expense" is correct answer.

Solution 2:

Project's Annual cash inflows = Net Operating income + Depreciation Expense

= $484600 + $562400 = $1,047,000

Solution 3:

Present value of Annaul net cash inflows = Annual Cash inflows * cumulative PV factor @ 16% for 5 periods

= $1047000 * 3.274= $3,427,878

Solution 4:

Net Present value =Present value of Annaul net cash inflows - investment in equipment

= $3,427,878 - $2,812,000 = $615,878

Solution 5:

Variable Expense ratio = 45%

Contribution ratio = 100 - 45% = 55%

Contribution = sales *55% = $2855000 *55% = $1,570,250

Annual cash Inflows = Contribution - Fixed expense incurrecd in cash= $1570250- 798000 = $772,250

Precsent value of annual cash inflows = $772250*3.274 = $2,528,347

Net Present value = $2,528,347 - $2,812,000 = - $283,653 (Negative)

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